Edward Prescott, Nobel Prize-winning economist who saw harm in quick fixes, dies at 81

Edward Prescott, a Nobel Prize-winning economist who has urged policymakers to take a long-term view of economic strategies and resist short-term tinkering on issues such as jobs and interest rates, arguing that the a search for a rapid boom can often be followed by a sobering crisis, died Nov. 6. at a health care center in Paradise Valley, Arizona. He was 81 years old.

His son, Edward, said his father was receiving treatment for cancer.

Dr Prescott’s work with Norwegian economist Finn E. Kydland, with whom he shared the 2004 Nobel Prize in Economics, was as much about high-level politics as consumer psychology – with particular relevance to concerns current trends regarding rising food and energy prices. and the many voters looking for a culprit.

Dr Prescott challenged the widely held outlook among Western central bankers and economic policy chiefs favoring direct interventions, such as raising interest rates to fight inflation or lowering borrowing costs in the goal of reviving business growth and consumer spending.

He argued that the adjustments may provide temporary relief but end up causing disruptive economic peaks and valleys. A calmer path, he argued, is better for financial markets and job growth, and reduces the risk of public and corporate mood swings.

The key to any good policy, summarizes Dr. Prescott, is making a commitment and sticking to it.

“What I am about to describe to you is a revolution in macroeconomics,” Dr. Prescott wrote in the American Economist in 2006.

The essay then distilled theories from a seminal 1977 paper by Dr Prescott and Kydland, titled “Rules Rather Than Discretion: The Inconsistency of Optimal Plans” and written in an era of American “stagflation”, a combination of high inflation and stagnant economic growth. .

Fluctuations and unpredictability in economic policy fuel turbulence, exacerbate boom-and-bust cycles, and lead to potentially damaging decisions on the home front, they argue.

If a family, for example, expects higher taxes in the future, they may spend more now and save less, Dr Prescott theorized. If companies anticipate interest rate hikes in an attempt to control inflation, they can raise prices in advance and keep the inflationary cycle going.

“You shouldn’t think in terms of controlling the economy,” Dr. Prescott said in 2004. “It leads to bad outcomes. You should think in terms of commitment to good political rules.

“Much of his work challenged the way we modeled economic policy, forcing us to dig deeper into our theories and test our theories against data,” said Art Rolnick, former director of research at the Federal Reserve Bank of Minneapolis, where Dr. Prescott was an advisor while he held various teaching and research positions, including at Arizona State University since 2003.

The Nobel committee said that Dr Prescott and Kydland, now at the University of California, Santa Barbara, challenged views on the “credibility and political feasibility of economic policy”.

For some critics, however, Dr. Prescott and Kydland were on intellectually shaky ground.

Their theories have trampled on one of the architects of economic policy since the Great Depression, John Maynard Keynes. According to the Keynesian vision, those in charge should always have control over the economic levers. During crises, increase government spending and lower interest rates, Keynes advised. To fight inflation, raise rates and allow for higher unemployment.

Dr. Prescott countered that the Keynesian model is incomplete. He said economic cycles are influenced more by disruptions – new technologies or major events such as wars or the covid pandemic – than by monetary policies.

Peter Lindert, professor emeritus of economics at the University of California, Davis, wrote in 2003 that Dr. Prescott was “heavily laden with speculation” and “educated, intelligent and plausible fiction”. In 2004, former treasury secretary Lawrence Summers told the Wall Street Journal that Dr Prescott’s theories on business cycles were “implausible”.

Dr. Prescott acknowledged an inescapable fact: his theories often clashed with the realities of democracies, where economic downturns prompt action quickly and politicians use fiscal policy changes as campaign promises.

“Nothing is easy in politics,” Dr Prescott said in a 2005 speech.

Edward Christian Prescott was born on December 26, 1940, in Glens Falls, New York, where his mother was a librarian and his father was an industrial engineer with Imperial Wallpaper and Pigment Co.

Dr Prescott said he held summer jobs at local paper mills as a teenager. “I learned to know, love and respect my colleagues who did not have the opportunities I had”, he would later write.

He graduated from Swarthmore College in 1962 with a degree in mathematics and earned a master’s degree in operations research in 1963 from the Case Institute of Technology (now Case Western Reserve University) in Cleveland. He earned a doctorate in economics from the Carnegie Institute of Technology (now Carnegie Mellon University) in 1967.

Before becoming a professor at Arizona State, Dr. Prescott has taught economics at the University of Pennsylvania, Carnegie Mellon, the University of Minnesota, and the University of Chicago. At Carnegie Mellon in the early 1970s, Dr. Prescott met Kydland, then a graduate student, and became his thesis supervisor.

A decision to spend 1974-75 at the Norwegian School of Business and Economics in Bergen, Norway resumed Dr. Prescott’s collaboration with Kydland, who was on the faculty.

Dr Prescott often said that one of his great pleasures was teaching and working as a doctoral advisor to “help students through this very difficult transition from student to researcher”, he wrote in his memo. biography for the Nobel Committee.

A University of Minnesota tribute to Dr Prescott said he enjoyed walking into his colleagues’ offices and asking with a smile, “What major advances are you making in economics today?”

Survivors include his 57-year-old wife, former Janet Dale Simpson; sons Edward and Andrew; daughter Wynne; and six grandchildren.

Despite Dr. Prescott’s rejection of monetary policy interventions, he was outspoken in his belief in certain conservative ideologies: that lower taxes stimulate economic growth and that Medicare and Social Security benefits should be cut. He regularly took aim at higher tax rates in Europe that fund programs such as health care, but which he said also dampen economic dynamism.

In 2009, Dr. Prescott joined more than 200 economists and others in an open letter from the libertarian Cato Institute opposing President Barack Obama’s American Recovery and Reinvestment Act after the major fiscal upheavals of the global economic downturn.

“Lower tax rates and a reduced burden on government are the best ways to use fiscal policy to spur growth,” said the letter, which was published in The New York Times and other publications. .

Dr. Prescott has also taken a public stand against estate taxes, called death taxes, on a person’s assets that are bequeathed to survivors.

“Economists like simplicity. It’s one of our most endearing traits,” he wrote in a 2006 op-ed in The Wall Street Journal. “As soon as you complicate things by interposing yourself between a man and his intentions, you create all sorts of distortions that are often suboptimal (and are the devil to model). Taxes excel at these shenanigans. And those distortions don’t stop when the grim reaper comes calling. Ashes to ashes, dust to trust.

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